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The first online chat system with a graphical rather than a text-based interface, Habitat greatly influenced the development of future systems. Both the design decisions made for Habitat and the social lessons that emerged from it continue to shape the online graphical-chat industry. Created in 1988–89 by Chip Morningstar and F. Randall Farmer, Habitat ran for several years in the United States before moving to Japan, where Fujitsu still operates a version called Habitat II. In the United States, Habitat's direct descendant, WorldsAway, later became VZones, operated by http://Avaterra.com, Inc.

Habitat was originally developed for LucasFilms through the online service QuantumLink. The use of Commodore 64 computers by QuantumLink's subscribers confined Habitat's designers to the capabilities of what even then was an outdated and very limited machine. Given the fact that almost all online communication occurred through text at that time, Habitat's creators accomplished a great deal with a very small amount of computing power, and pioneered the use of graphical representations for online chat users.

Habitat started at about the same time that MUDs (Multi-User Dungeons or Dimensions) were becoming popular online, and it resembled many of the social MUDs, but with the addition of graphics. MUDs are online text-based systems; users, sometimes numbering in the hundreds, connect to a single computer and communicate with each other through text. MUDs are set up to textually represent a virtual world and allow people to chat, explore the virtual environment, and play games with each other or with the computer. Habitat most closely resembled TinyMUDs, which also got started in 1989. TinyMUDs differed from the previous, more game-oriented MUDs in that they did not include a scoring system and allowed users greater freedom to create their own virtual environments. Similarly Habitat had an open-ended virtual economy rather than a scoring system, and allowed users considerable freedom of choice with regard to activities and use of its virtual world.

Habitat looked like an animated cartoon. Houses, trees, and other landscape features were represented by simple, blocky graphics, and people were represented by avatars, which looked like cartoon characters. Avatars—the term is derived from a Hindu word referring to the worldly incarnation of a god—represented individual users in Habitat, serving as their virtual selves in the graphical environment. The avatars were usually human in appearance, and users could customize them somewhat by choosing from a variety of different heads. In keeping with the cartoon style, even speech in Habitat appeared as text-filled balloons over the avatars' heads.

Avatars could also acquire and interact with various objects in the virtual environment. “Vending machines” allowed users to purchase objects, using tokens. A certain number of tokens were given to each avatar each day as the user logged on, so the longer a user participated, the more control he could have over the environment. Since objects could be sold as well as bought, users could exchange objects and create a simple virtual economy. In one instance, a few savvy users discovered that one vending machine was buying certain objects for a higher price than another machine was charging for them. Overnight, these users engaged in the tedious task of repeatedly buying from one machine and selling to the other over and over again, until they had amassed a considerable fortune in tokens.

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